Friday, January 29, 2016

Has the world gone crazy all at once?

Overnight the Bank of Japan announced a fairly shocking move to Negative Interest Rates (you'll hear this referred to as NIRP - negative interest rate policy).  This really caught investors flatfooted because just a week ago the Bank of Japan said they had no plans to adopt such a policy.

In a nutshell, here's what this means - If you buy a government bond in Japan (ie, lend them money) you get to pay the government for the pleasure of lending them your money.

Yes, this is crazy, but this the world we live in now.  Japan has now joined a number of European countries in trying to reflate their economies using old world techniques.

This is akin to a cable TV company hearing that subscribers are leaving them for Amazon Prime & Netflix so they decide to give you a free typewriter with every upgrade.  The central banks around the world are fighting a losing battle to increase inflation (and wages, etc) with tools from the 20th century.  However, we're in the 21st Century and the globalization of our economies means that these tools will no longer work.  Deflation is a beast that can't be contained within borders.  If prices rise in country X, you move your operations to country Y to lower costs.  This is why we are seeing so many of our global economies struggle.  In the long run, this is a very bad sign for the world's 3rd largest economy and it furthers my argument that Japan is a larger version of Greece with a worse demographic outlook.

The global stock market reaction has been very weird.  Initially stocks soared 2% globally only to fall back into negative territory within the hour and then soar again in a very organized trade overnight. While I think you could argue that this is a mild positive for the Japanese stock market (their plan is to weaken the value of the Yen which will increase stock prices, however since your Yen will buy less the average citizen would not be impacted) but the argument that ALL stock prices should rise is really flawed.  The 2nd and 3rd largest economies in the world are beginning to engage in a global currency war (China might pull their own black swan and really devalue the Yuan in response).  This will make our products much more expensive globally and damage the US economy in the long-run.  Currency wars are a zero sum game, if Country A wins, Country B loses.

However, markets are no longer based on rational thoughts like these.

Today, the mantra will be - BUY EVERYTHING BECAUSE THE CENTRAL BANKS WILL SAVE US AGAIN!

Good luck and remember that Selling the Rips has been the only winning strategy in 2016.

Cheers!

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